- Since the introduction of Freedom and Choice, 60% of schemes now offer three or more investment and lifestyle strategies, allowing members to target different retirement outcomes easily
- Only 22% have defaults targeting annuities – a significant change in the landscape to before freedom and choice was introduced where the vast majority of DC schemes’ defaults targeted annuity purchase
- 36% of schemes have allocated a significant proportion (over 75%) of the initial growth phase of their default strategy to equities
- Concerningly, 39% of schemes do not offer pre-retirement communication to their members until six months before their Target Retirement Age (TRA)
Lane Clark & Peacock’s (LCP) latest DC Investment Survey – How are DC schemes adapting to freedom and choice? – has found that, three years after Freedom and Choice was introduced, 60% of schemes now offer more investment flexibility, including three or more lifestyle strategies. Although this is a positive step, trustees and employers do need to be mindful of overwhelming DC savers by offering too much choice without clear explanations in language that members can understand.
Auto-enrolment has meant that millions of people are now saving into a pension for the first time. However, minimum contributions are unlikely on their own to lead to adequate levels of retirement income for the majority of savers.
Whilst the level of contributions is key, positive outcomes for members of DC schemes are more likely to happen if those savings are working as hard as possible, particularly in the early years. Although it is good to see 35% of schemes have allocated over 75% of the initial growth phase of their default strategies to equities there is still progress to be made in this area: our survey also shows that around 25% of schemes have less than half of the initial growth phase allocated to equities.
Whilst we believe that equities represent a good long-term asset for younger DC members we are encouraging schemes to look at other ways to access growth which could result in better risk adjusted returns for members. Platform restriction has meant DC schemes have in the past struggled to access private markets – (areas such as Infrastructure, Private Credit and Private Equity). However, we hope to see investment managers and DC platforms continue to innovate in these areas to finally allow DC members access at reasonable cost to asset classes which DB schemes have been able to benefit from for many years. .
As members approach retirement their focus should shift to considering how they plan to access their savings. However, communication with members should start well before their target retirement age (“TRA”). Otherwise members that don’t retire at their TRA may find that they have de-risked too soon; conversely, members who access their benefits early may find that they have been exposed to an unnecessarily volatile investment strategy.
It is therefore concerning that nearly 40% of schemes do not offer pre-retirement communication to their members until six months before their TRA meaning members will have little time to think about their retirement choices, if their target retirement age (‘TRA’) remains appropriate and if their investments suit those decisions.
Erica Beltrami, LCP partner, commented:
“Although we are seeing greater flexibility when it comes to the amount of choice that members are offered, trustees and employers must be mindful of overwhelming DC savers by offering them too much choice without communicating clear explanations. Trustees and employers should make sure their communications clearly state the objectives of each strategy in a language that ordinary members can understand so that those members can make informed decisions.”
“Although schemes offer a range of investment strategies to meet retirement flexibilities, the focus must be on targeting the outcome that most suits each individual member’s retirement needs. Establishing a tailored pre-retirement communication strategy within which the interest of members is not just anchored around their TRA but also has age milestones, will go a long way to helping savers to target a greater retirement income."